Many of my clients have asked for advice when it comes to leaving large sums of money to their children and grandchildren. They are worried that their lifelong savings they are passing down will be “frittered” away in a short time unless properly managed.

Creating a spendthrift trust for your loved one can limit their spending and protect their inheritance. While this type of trust may come at the expense of their autonomy, it can provide them with greater financial security.

What Is a Spendthrift Trust?

A spendthrift trust protects beneficiaries who may need help managing their finances responsibly. The trust preserves the beneficiary’s inheritance for use over an extended period.

Spendthrift trusts work by giving a trustee, rather than the beneficiary, the power to make financial decisions. The trustee manages the trust assets and distributes funds to the beneficiary for their needs and support.

The trust’s terms outline the trustee’s discretion in making distributions, which can be limited or flexible. The creator of the trust, or grantor, may leave the timing and amount of the distribution up to the trustee, or they may opt to establish a fixed schedule. These restrictions prevent the beneficiary from squandering the assets.

Spendthrift trusts can benefit the following individuals:

  • Children – Parents often have concerns about how their minor and young adult children will use an inheritance. Minors typically need more life experience to make independent financial decisions. Some parents want to provide for college-age adult children but worry about giving them full access to the funds.
  • People who are not good with money – Some adults struggle with financial planning and impulse control. For these individuals, a spendthrift trust can ensure a steady source of support.
  • Vulnerable individuals – People who are susceptible to external influences that threaten their financial well-being can benefit from the security and structure of a spendthrift trust. If your loved one has been taken advantage of before, you may worry that they will be exposed to improper influence again.
  • Those with addiction disorders – A spendthrift trust could prevent a beneficiary from exhausting the trust fund to support an addiction to gambling, illicit substances, or compulsive spending.

As parents and grandparents, we hope our family will always spend wisely……but we also know this is not the real world. Planning in advance can give us some peace of mind that an inheritance will not disappear in a moment.

Be Educated! Be Proactive!